After two years without a hangover to nurse as the new year rolls in, several of New York’s biggest real estate players agree that 2016 may require a bit more aspirin to get through.
However, they tend to agree that a relaxed market may not be cause for concern.
“The recovery appears to be losing some steam,” Mitchell Steir, CEO & Chairman of Savills Studley told Real Estate Weekly. “Space alternatives will gradually increase, and rental rate growth should lose traction — particularly in Midtown — as the year progresses. Availability is approaching its low point in this cycle, and in turn we will likely hit peak average rent for Class A space in Midtown sometime in the next few quarters,” he said.
“We have already seen a few landlords lower their rents,” continued Steir. “It is hard to notice these adjustments amidst all the hype about $100-plus rents, but it is happening. We think that 2016 will set the stage for even more favorable conditions for tenants in 2017 and 2018.ˮ
Colleague Woody Heller agreed that a plateau has been reached across the commercial New York markets.
“I think the market has already started to correct. I think it started to correct last summer but nobody was really talking about it until late into the fall,” said the executive managing director at Savills Studley.
“I think more people are openly acknowledging what is transpiring,” Heller added.
He stressed that a slower 2016 is by no means a reason to panic. “I think we’ve been in a world of 11 for the last couple of years,” said Heller referencing the volume nobs on a standard amplifier. “[New York has] set records, gone beyond all historical levels. If we had a retraction and went back to only 10, that would be great because 10 was still fantastic. We’ve all just been inebriated and gotten use to 11, but 10 was still terrific.”
Heller said that while investment sales may slow down even in red-hot boroughs like Brooklyn, those looking to roll money into the market are not going to be deterred by recent changes to the playing field.
“The amount that interest rates are rising is minimal and not necessarily impactful,” he said pointing to the recent Fed rate hike. “Demand is well exceeding supply; interest rates aren’t scaring anybody off.”
Heller admitted that if prices did begin to level off and if the market “retreated” then there may be some initial concern amongst investors. But he pointed out that this reaction is typical and that there will still be a sturdy flow of capital to rely on.
“I think people are feeling cautious but are very compelled to be active because they don’t know where else to put their money,” he said.
Aaron Jungreis, co-founder of Rosewood Realty Group who focuses on multi-family, office and retail buildings, has been especially busy, particularly in Queens.
He predicted that some sub-markets may begin to level off in the near future. “I can definitely see it curtailing,” said Jungreis while discussing the markets like the Bronx and Upper Manhattan. “It’s gone up so much eventually it’s going to have plateaus.”
David Heiden, managing member of W Financial Fund LP, has seen a solid mix as well with hefty helpings of both foreign and domestic investors looking to secure finance in the New York market.
He pointed to foreign capital as a reason to believe that New York will not be harmed by a mild correction. In fact, foreign capital may be a key reason a tempering of prices is necessary.
“I think it’s going to slow down,” Heiden said. “I think it’s a combination that prices have gotten very, very high relative to value.
“There’s a lot of foreign capital coming into the market now and they’re buying based on security as opposed to yield. I’m seeing banks getting a bit more cautious on the lending side and I think because of those factors we’re going to see little bit of a slowdown.
“I don’t see a recession or anything like that, but I think there’s a slowdown.”
“What’s going to happen to us is subject to the way the rest of the world goes,” added Heiden who feels that, barring an unforeseen, catastrophic event such as a recession in China, New York will continue to be a place that beckons to the world’s wealthiest investors.
As the correction unfolds, it may finally put clamps on the investment sales arena in Brooklyn. A market that has climbed frantically over the last decade, Heiden said that several entities with which he has worked to fund projects in the borough have decided to take their foot of the gas temporarily.
“Brooklyn is slowing down,” he said. “There’s a lot less acquisitions because pricing has gotten too high. We deal with a lot of guys who do a lot of work in Brooklyn. They buy and they rehab, or they buy and they build, and these guys have slowed down.”
While the general consensus amongst those in the industry is that a price stabilization is both underway and a positive for the market, Lazer Sternhell, CEO of Cignature Realty, is not yet sold on a correction being imminent.
“Believe it or not, we see prices moving forward and going higher,” said Sternhell, who specializes in large multi-family deals in Upper Manhattan. “We don’t see any indication to the contrary. Interest rates are stable, I know they popped up a bit, but basically they’ve been stable. The rental market is very strong among both foreign and local for real estate investors.
“I can tell you as a broker that there’s a lot of liquidity in the market for real estate.”
Sternhell also said that investment sales will continue stimulate other aspects of commercial real estate such as retail and restaurants.
“One thing we definitely see consistently over the years is gentrification,” he said referring to Upper Manahttan’s growth. “The area has a very strong rental market. There is more of a local vibe uptown,” he added.
Heller doesn’t disagree with Sternhell’s optimism in a general sense. While he believes a correction is more obvious than Sternhell appears to, he made clear that the market is still very strong.
Heller pointed to the office leasing market in Midtown South as an example of an incredible market place that will not be whittled down due to a pause in surging prices and rental rates.
Citing the demand by technology companies and other entities for space in the area, Heller said that he doesn’t see that area losing steam. But he doesn’t see it racing forward into 2017 either.
“I think it’s going to be a period of stability, but definitely not growth,” he said.